Helping America Navigate a New Energy Reality

Tom Whipple

About Tom

Tom Whipple is the editor of ASPO-USA’s two flagship publications, Peak Oil News and Peak Oil Review. Tom is a former senior analyst for the Central Intelligence Agency (CIA). Since retiring from the CIA, Tom has become a well-known researcher and writer on energy and oil issues. Tom writes a weekly column on peak oil for the Falls Church News, a daily newspaper based in northern Virginia. Tom holds degrees from Rice University and the London School of Economics.

“The OPEC drama is behind us (for now) with the cartel and its friends agreeing to a peak supply. But the topic that’s talked about behind the scenes in Viennese cafes is that of ‘peak demand.’ Every pundit has an opinion about when peak demand will happen. Articles, podcasts, and snappy videos mostly debate in what year our 150-year addiction to the product will begin to wane. Some think it’s as early as 2020; the authoritative International Energy Agency conjectures 2040.”

The agreement between OPEC and Russia came as a surprise for most. Until the Vienna meeting started, there was much pessimism that a deal would be reached and all indications had been that negotiations were deadlocked over the issue of who would cut by how much. The breakthrough seems to have come when Moscow changed its position from “freeze but no production cut” to agreeing to reduce output by 300,000 b/d from the 11.2 million b/d it reached in November. This change, plus the agreement by Baghdad to cut oil production by 210,000 b/d, was enough to convince the Saudis to cut by 486,000 b/d and the other Gulf Arab states would join in for at total Gulf Arab cut of 786,000 b/d. Libya, Nigeria, and Indonesia were left out of the agreement and Tehran was allowed to increase production by 90,000 b/d to 3.8 million – somewhat short of their 4 million b/d goal. Given the bad relations between Riyadh and Tehran, allowing the Iranians to continue increasing production was the toughest part of the deal for the Saudis to swallow.

“People do tend to look at the total volumes [of conventional oil] being added in recent years and conclude that we are running out of subsurface potential, I find that unlikely. It’s our view that conventional exploration is a perfectly viable growth and renewal option, particularly for those that are good at it. In reality, a lot of exploration’s recent decline is nothing more than the fact that it’s drilling fewer wells in the downturn.”

Oil prices were steady in the first part of the week as the markets waited for news about the OPEC meeting this week. When it was announced on Friday that the Saudis would not attend a preliminary meeting with the Russians and other non-OPEC members, prices dropped about $2 a barrel to close circa $46 in New York and $47 in London. Although analysts and market traders remain skeptical that any significant agreement will be reached, the week began with a spate of reports from “insiders” that “progress” was being made.

“It’s about 20C [36 degrees Fahrenheit] warmer than normal over most of the Arctic Ocean, along with cold anomalies of about the same magnitude over north-central Asia…. The extreme behavior of the Arctic in 2016 seems to be in no hurry to quit.”

Oil prices climbed on Monday but then held steady for the rest of the week as talk of an OPEC agreement balanced against a stronger dollar and increasing global oil surpluses. At week’s end, New York futures settled at $45.69, about $2 above the recent lows touched the week before last, but $7 below the tops of the speculative bubbles set in June and early October.

“I don’t think President Trump will have a big impact on oil demand or output. He’s made statements, but we haven’t seen any thought-out policies. We will have to wait for him to get a team in place and come up with policies.”

Mike Wittner, head of oil-market research at Societe Generale SA in New York

Last week oil prices suffered their fourth losing week in a row as OPEC continued to argue over a possible production freeze/cut and oil production continued to grow adding to the surplus. At week’s end, futures prices were down to $43.41 in New York and $44.75 in London. The surprising US election results roiled for a few hours on after the results became known, but prices settled on Wednesday with a small gain and were down on Thursday and Friday on new reports of oil production increases and stockpile builds.

“We’ve long been of the opinion that demand will peak before supply. And that peak may be somewhere between 5 and 15 years hence, and it will be driven by efficiency and substitution, more than offsetting the new demand for transport.”

Simon Henry, Chief Financial Officer for Royal Dutch Shell

“The oil demand growth is not coming from cars; it’s from trucks, aviation and the petrochemical industry and we don’t have major alternatives to oil products there. I don’t buy the argument that electric cars alone will cause a peak in oil demand at least in short and medium term.”

Oil prices continued to slide last week with New York futures down by nearly $8 a barrel from the recent highs set in mid-October. The week closed out with NY at $44.07 and London at $45.58. The hype over an OPEC production freeze which has been driving prices up since last spring is no longer moving prices higher. OPEC and Russia have to come up with a significant production cut in the next three weeks or be faced with lower prices until supply and demand come back into balance from economic forces. The final OPEC meeting to approve a cut is only three weeks away (November 30th) and so far no progress has been made at preliminary meetings that were intended to work out details.

Oil prices trended down last week to register the biggest loss in six weeks. At the close New York futures were at $49.27, down from $50.50 on Monday, and London was trading at $50.03. There was a brief rally during the week when US crude stocks came in lower than expected, but the week’s decline came mainly because traders lost faith that OPEC will be able to reach agreement on a production freeze.

“On the supply side, non-OPEC supply growth has reversed into declines due to major cuts in upstream investments and the steepening of decline rates. Without investment, that trend is likely to accelerate with the passage of time to the point that many analysts are now sending warning bells over future supply shortfalls and I am in that camp.”

“I don’t quite share the same view that others have that we are somehow on the edge of a precipice. I think because we have confirmed the viability of very large resource base in North America … that serves as enormous spare capacity in the system. It doesn’t take mega-project dollars, and it can be brought online much more quickly than a 3-4 year project. Never bet against the creativity and tenacity of our industry.”

Except for a brief spike on Wednesday following the release of the EIA’s stocks report, oil prices were relatively stable last week trading around $51-52 a barrel in New York and London. Little price movement can be expected until the OPEC/Russia combine agrees on the nature of a production freeze, if any. Last week, there were mixed signals from Moscow as to just what their intentions regarding a freeze would be. With several countries expecting an exemption from any production cap, the bulk of the cut would likely fall on the Saudis and the other Gulf Arab states. The IEA is still saying that it does not expect the price of oil to go much above $60 in the near future as US shale oil producers would quickly flood the markets, offsetting any OPEC freeze of the size under discussion.

“We believe that the Barnett shale offers compelling evidence that technology improvements ultimately cannot overcome geology. We believe the implication is that shale is a scarcer resource than generally considered and thus are more constructive longer-term as the world must seek a more marginal barrel to match future demand growth. That is bullish for longer-term oil price.”

“Increasing lateral length hurts all horizontal well performance as frictional losses increase and in the Barnett, optimal well length was determined by balancing reduction of fixed costs with reduced incremental production. Even correcting for lateral length, Barnett wells got worse with time. The E&P narrative is that a revolution in technology of improved completions (more sand, water, clusters, geo-steering, landing, etc.) is pushing down the cost curve. Yet we fail to see it in the most complete data record we have.”

Last week started with a flurry of speculator optimism deriving from the World Energy Congress in Istanbul during which the Russians backed Saudi efforts to raise prices using a production freeze, the details of which have yet to be determined. For the rest of the week, oil prices moved little as various reports affecting the oil markets showed that it is unlikely that a significant OPEC/Russian production agreement can be negotiated. The week ended with New York futures settling at $50.35 and London at $51.95. Most analysts do not expect any significant change in prices until the fate of the freeze becomes known around the end of November. In the meantime, technical exchange meetings will take place to see if an agreement can be worked out. Recent and projected increases in OPEC production make it likely that considerably larger production cuts than were agreed to at Algiers will be necessary to move prices higher. Goldman Sachs warned last week that the planned Russian/OPEC production freeze is unlikely to be enough to rebalance the markets in 2017.

“This discovery [Smith Bay; see Briefs below] could be really exciting for the state of Alaska. It has the size and scale to play a meaningful role in sustaining the Alaskan oil business over the next three or four decades.”

Caelus CEO Jim Musselman.

“With an oil pipeline that is three-quarters empty, this is good news for the state of Alaska.”

The rally that began with the announcement of the OPEC production freezes in late September continued through Thursday last week. There is much skepticism that the tentative agreement, which will not be signed for another six weeks, will have a significant impact on global oil supplies. Crude prices slipped on Friday settling at $49.81 in New York and $51.93 in London. The 10-day rally now has taken prices up by about $5 a barrel. OPEC and the Russians have figured out that just talking about supply cuts can increase oil revenues substantially. A $5 price jump increases OPEC’s revenues from pumping roughly 33 million b/d by some $160 million a day.

““There are few easy answers, but one thing is clear: the current trajectory of climatic change presents a strategically-significant risk to U.S. national security, and inaction is not a viable option.”

Statement by the Center for Climate and Security, a Washington-based think tank, signed by more than a dozen former senior military and national security officials

Oil prices continued to fall last week, closing Friday in New York at $43.39 and $46 in London. There was considerable news tending to push prices lower. OPEC and the IEA revised their forecasts for the next year and concluded that the imbalance in the oil markets would continue into 2017 vs. predictions that the gap would close this fall. This coupled with increased Iranian production; the possibility that Libya and Nigeria oil production will soon rebound; the report that Bakken shale oil production grew in July and EIA’s admission that US oil production is not falling as rapidly as forecast; all contributed to the weaker oil markets.

“2017 is the sweet spot for integrated companies. It took two to three years to adjust to the drop in oil prices, and a lot of the efficiencies introduced in recent years will roll into 2017 when projects kick in and free cash flow will improve.”

It was a volatile week, with New York futures starting out at around $43 a barrel on Monday, climbing to $47.50 on Thursday and then falling to close at $45.88 on Friday. The major event last week was the EIA status report, which came out on Thursday, reporting a near-record fall in the US crude stocks of 14.5 million barrels from the week before last. This was the largest weekly drop in 17 years and set off a short-lived buying frenzy. Traders ignored the impact of tropical storm Hermine which was thrashing around in the Gulf that week, closing production platforms and delaying tanker arrivals along the Gulf and East Coasts. The EIA reported that US crude imports were down by 12.6 million barrels from the week before, and that US refineries were running at 93.7 percent of capacity to satisfy US gasoline consumption demand over Labor Day. By Friday, traders realized that the crude drop was likely a one-off event and not the beginning of a trend.

The struggle between fundamentals and speculators’ dreams of much higher prices continued last week with oil futures falling through Thursday and then rebounding on Friday to close at $44.44 in NY and $46.83 in London, down about $2.50 for the week. The fundamentals include growing stockpiles, increasing US and Canadian rig counts, and fears that US interest rates will be going up shortly which will lead to a stronger dollar and lower oil prices.

“When it comes to scarce resources, the simplest solutions on the surface are not always the best ones. You have to change people’s behavior, reassess society’s dependency on this resource and reduce consumption—otherwise society may, in fact, be more vulnerable to catastrophes than safer, despite clever solutions.”

Linda Kuil, Vienna Technology University, in a study on Mayan civilization and water resource constraint

Be a Friend !

“The notion of ‘rig productivity’ has to be taken with caution. We can’t assume that the best-posted performance in the field is the norm for all wells…There is a statistical distortion at play. Starting in late 2014, the severe downturn in oil prices forced the industry to park three-quarters of their rigs and ‘high-grade’ their inventory of prospects. Producers focused on only their best rocks, drilling with only the most efficient rigs. All the low productivity stuff was culled out of the statistical sampling, skewing the average productivity numbers much higher.”

"If we are to believe Lux Research, Big Oil should use the cash it has, while it still has it, to enter the energy storage market. It has become abundantly clear that lying low and waiting for oil prices to reach former heights is useless since nobody can say with certainty whether or even if this will happen at all.
“If we are to believe Big Oil, all is well, and crude will soon jump back to $100 a barrel to the joy of shareholders all around. If it doesn’t, Big Oil will just continue cutting costs and maintaining dividends. The problem with this approach is that it’s unsustainable over the long term. This is just basic survival, while in the meantime, other leaner, more far-seeing companies [like France’s Total] bet on a future in renewable energy.”

“The North America market has turned. We expect to see a continued modest uptick in the U.S. rig count during the second half of the year.”

Dave Lesar, Halliburton CEO said two weeks ago

[Among drillers] “There is a lot of hope, but hope is not a plan. Companies keep saying we can make money at $45 oil but these companies do not put their money where their mouth is." Below $55 a barrel, about half of U.S. oil production is “uneconomic," according to

“When oil prices crashed in the 1980s, the same thing that is happening today occurred in the industry then: companies went out of business and workers were laid off. And because there were few job openings, very few young people between the mid-1980s and 2000 went into oil and gas. As a result, much of the workforce that stuck around is now aging and moving closer to retirement, setting up the industry for a labor crunch, or the ‘Great Crew Change,’ as some dub it. There are too few experienced professionals to replace retiring workers.”

“Electricity generation is a significant consumer of water: it consumes more than five times as much water globally as domestic uses (drinking, preparing food, bathing, washing clothes and dishes, flushing toilets and the rest) and more than five times as much water globally as industrial production…If policymakers fail to take into account the links between energy and water, we may come to a point in many parts of the world where it is water availability that is the main determinant of the energy sources available for use.”

“The disturbing truth is that the real cost of oil production has doubled since the 1990s. That is very bad news for the global economy. Those who believe that technology is always the answer need to think about that…Tight oil may have bought us a few years of abundance but the resulting over-supply, debt and prolonged period of prices below the cost of production have exacted a terrible cost. Under-investment, a damaged service sector, weak oil company balance sheets and a decimated work force practically ensure cripplingly higher prices a few years in the future.”

“The embattled crude oil and natural gas industry worldwide has slashed capital spending to a point below the minimum required levels to replace reserves — replacement of proved reserves in the past constituted about 80 percent of the industry’s spending; however, the industry has slashed its capital spending by a total of about 50 percent in 2015 and 2016. According to Deloitte’s new study, “Short of Capital? Risk of underinvestment in Oil and Gas is amplified by competing cash priorities,” this underinvestment will quickly deplete the future availability of reserves and production.”

On the Canadian oil sands: “It is not a growth sector, and one of the issues particularly for the oil sands is, if you’re sitting in London or New York or Hong Kong or Tokyo and you’re running institutional money, are you really going to think about being a shareholder in something that’s going to cost billions, take 10 to 15 to 20 years to realize a return and be in the high-cost production when price is under pressure and global growth is slow? I don’t think so…. In general, we’re the [world’s] high-cost producer…. And in a US$50 [oil market] … we’re just not competitive.”

"The widely recited rhetoric that Canada must continue its de facto energy strategy of liquidating its remaining non-renewable resources as fast as possible to maintain the economy has no credibility.”

The agreement between OPEC and Russia came as a surprise for most. Until the Vienna meeting started, there was much pessimism that a deal would be reached and all indications had been that negotiations were deadlocked over the issue of who would cut by how much. The breakthrough seems Read more...

28 Nov 2016

Oil prices were steady in the first part of the week as the markets waited for news about the OPEC meeting this week. When it was announced on Friday that the Saudis would not attend a preliminary meeting with the Russians and other non-OPEC members, prices dropped about $2 a Read more...

21 Nov 2016

Oil prices climbed on Monday but then held steady for the rest of the week as talk of an OPEC agreement balanced against a stronger dollar and increasing global oil surpluses. At week’s end, New York futures settled at $45.69, about $2 above the recent lows touched the week before Read more...

14 Nov 2016

Last week oil prices suffered their fourth losing week in a row as OPEC continued to argue over a possible production freeze/cut and oil production continued to grow adding to the surplus. At week’s end, futures prices were down to $43.41 in New York and $44.75 in London. The Read more...

7 Nov 2016

Oil prices continued to slide last week with New York futures down by nearly $8 a barrel from the recent highs set in mid-October. The week closed out with NY at $44.07 and London at $45.58. The hype over an OPEC production freeze which has been driving prices up Read more...

The agreement between OPEC and Russia came as a surprise for most. Until the Vienna meeting started, there was much pessimism that a deal would be reached and all indications had been that negotiations were deadlocked over the issue of who would cut by how much. The breakthrough seems to have come when Moscow changed its position from “freeze but no production cut” to agreeing to reduce output by 300,000 b/d from the 11.2 million b/d it reached in November. This change, plus the agreement by Baghdad to cut oil production by 210,000 b/d, was enough to convince the Saudis to cut by 486,000 b/d and the other Gulf Arab states would join in for at total Gulf Arab cut of 786,000 b/d. Libya, Nigeria, and Indonesia were left out of the agreement and Tehran was allowed to increase production by 90,000 b/d to 3.8 million – somewhat short of their 4 million b/d goal. Given the bad relations between Riyadh and Tehran, allowing the Iranians to continue increasing production was the toughest part of the deal for the Saudis to swallow.

Oil prices were steady in the first part of the week as the markets waited for news about the OPEC meeting this week. When it was announced on Friday that the Saudis would not attend a preliminary meeting with the Russians and other non-OPEC members, prices dropped about $2 a barrel to close circa $46 in New York and $47 in London. Although analysts and market traders remain skeptical that any significant agreement will be reached, the week began with a spate of reports from “insiders” that “progress” was being made.

Oil prices climbed on Monday but then held steady for the rest of the week as talk of an OPEC agreement balanced against a stronger dollar and increasing global oil surpluses. At week’s end, New York futures settled at $45.69, about $2 above the recent lows touched the week before last, but $7 below the tops of the speculative bubbles set in June and early October.

Last week oil prices suffered their fourth losing week in a row as OPEC continued to argue over a possible production freeze/cut and oil production continued to grow adding to the surplus. At week’s end, futures prices were down to $43.41 in New York and $44.75 in London. The surprising US election results roiled for a few hours on after the results became known, but prices settled on Wednesday with a small gain and were down on Thursday and Friday on new reports of oil production increases and stockpile builds.

Oil prices continued to slide last week with New York futures down by nearly $8 a barrel from the recent highs set in mid-October. The week closed out with NY at $44.07 and London at $45.58. The hype over an OPEC production freeze which has been driving prices up since last spring is no longer moving prices higher. OPEC and Russia have to come up with a significant production cut in the next three weeks or be faced with lower prices until supply and demand come back into balance from economic forces. The final OPEC meeting to approve a cut is only three weeks away (November 30th) and so far no progress has been made at preliminary meetings that were intended to work out details.